ities using IFRS rules as at the transition date (typically January 1, 2004 for a Euro-
pean listed company), giving rise to a one-time adjustment to retained earnings.
However, past business combinations do not have to be restated, and fair value can
be used for assets and liabilities if calculation of historical cost would require undue
cost or effort.
Companies would be expected to produce a reconciliation statement to take users
from the last year under the old accounting principles, to the same year restated ac-
cording to IFRSs, and used as comparatives for the first IFRS year. A typical Euro-
pean company would be expected, therefore, to publish 2004 accounts under national
rules in the normal way, then restate them under IFRSs, to be published both in a rec-
onciliation statement and as previous-year comparatives alongside the 2005 figures.
A particular problem, which so far remains unresolved, is the reporting require-
ments for the significant number of listed European insurance companies. The IASB
has no insurance accounting standard, although one is at an early stage of prepara-
tion. It seems highly unlikely that the IASB will have its standard for insurance con-
tracts in place in time. Consequently, either the IASB will have to provide some sort
of interim rule, such as recognizing existing practices (which are diverse), or the EU
will have to provide a deferral of the Regulation for insurance companies.
(e) IFRS Endorsement Mechanism. Not the least problem posed by the use of IFRS
in the EU is that the standards need to have legal force, and the Commission has been
obliged to devise some mechanism whereby a private sector body, not under the con-
trol of the EU, can in effect write accounting law for Europe. This has proved con-
troversial, and it remains to be seen how the arrangements will work out. The Com-
mission and others have argued that, provided it intervenes upstream in the IASB’s
due process, its views can be taken into account in the formulation of IFRS and there
is therefore no problem about the EU not having the opportunity to write its own
standards.
In practice, the Commission has in the past had a difficult relationship with the
IASC, only becoming an observer as late as 1995. Although France, Germany, and
the United Kingdom are represented on the new IASB as “liaison standard setters,”
there is no EU representation as such. The Commission is not represented directly on
the IASB or on the Standards Advisory Council (although it has observer status in the
latter). In addition, the Commission does not have the staff to participate in depth in
the IASB standard-setting process. The solution that has been put into effect has been
for the Commission to call on the private sector to participate in the standard-setting
process.
An organization called the European Financial Reporting Advisory Group
(EFRAG) has been created by the private sector. This is supposed to coordinate input
from national standard setters from the EU, to comment on discussion papers and ex-
posure drafts, to participate in advisory committees when asked, and to liaise with the
IASB in general. When a standard is issued, the EFRAG will provide a commentary
to the Commission, which then submits the standard to member state representatives
for endorsement.
EFRAG came into existence in June 2001. It has a supervisory board consisting of
representatives of the bodies that are sponsoring it: the Fédération des Experts
Comptables Européens (FEE—European Accountants Federation), the Union des
Confédérations de l’Industrie et des Employeurs d’Europe (UNICE—European Em-
ployers’ Union), European Banking Federation, European Savings Banks Group,
17.3 ACCOUNTING HARMONIZATION 17 • 9